Why I’m Happy Netflix Raised Its Prices

Recently Netflix announced a 60% price increase in their core DVD mail/streaming service. Many customers were upset, and some took to Facebook and Twitter to declare their outrage and plans to cancel the service.

I had a very different reaction. I was glad Netflix raised its prices.

That’s an unusual reaction for me, because usually I don’t like spending money. I drive a 15-year-old car. My house still contains big cathode ray tube TVs. I hate buying snacks at cinema concession stands.

But as a consumer, I have no problem being generous to companies that have a track record of being exponentially more generous to me.

A generous company is one that has repeatedly given me far more benefits than the dollars I have paid. A generous company is one that values the importance of stewardship and takes their talents, technology and profits to enrich their consumers versus just consume their riches. Netflix is consistently one of those companies.

I have been a customer since 1999. Initially I joined for the great convenience, the hassle-free service, and to avoid paying late fees. Since then, they’ve added many benefits that I’ve appreciated without me ever asking or being charged more for them. They added recommendations, ratings, streaming video, better content like Mad Men, and greater access. Today we have Netflix available on 10 devices in our home. My wife can be watching a World War II documentary on her iPhone, while I watch a DVD. And at the same the kids watch Toy Story 3 on the computer, all for no incremental charge. Even Apple restricts your media access to 5 devices.

Netflix’s history of generosity proves to me that they will take my money and invest it in an ever-improving product. They also have established a regular rhythm of innovation–every other week or so, I see new content. I believe that any profit I give them will come back to me in new benefits. Another potential benefit: if Netflix continues to acquire great content, someday I will be able to cancel my cable subscription and actually save money.

As a growth strategist, I have deep admiration for the price increase Netflix is implementing. They did three things that many companies don’t have the guts to do.

First, they had keen self-awareness and were honest about the future of their products. CEO Reed Hastings recently noted that DVDs have peaked. Not everyone can look at their core business and say its best days are behind it.

Second, they had a precision understanding of their Value = Benefits/Price equation. And they understood their true competitive set and their benefit domain. What they found was that $16/month is still cheaper than buying one DVD. I’m sure most Netflix users are consuming 10X more content than 1 DVD in a month. And it is far cheaper than a cable bill of $100/month.

Third, they had the courage to execute their portfolio strategy. Some companies know which businesses are Strategic Growth Engines vs. Manage for Margin businesses. Of those that know, few act on it. Netflix raised price on their Manage for Margin business (DVDs), to raise profits to acquire content and to steer consumers to streaming.

Finally as an observer of e-commerce, I applaud Netflix for going against the philosophical grain of “everything online should be cheaper and eventually free.” Sure, I would like my favorite products and services to be cheaper, but I would really like them to be improved to make my life better. Many e-commerce businesses are overly fixated on price. Far too many are fundamentally Supply Based Profit Models, whose primary method of value creation is by extracting and transferring it from someone else on the value chain. This is not sustainable and rarely leads to long-term innovation and increased value for the consumer.

In contrast, companies like Netflix have fundamentally Demand Based Profit Models. They consistently search for unfulfilled emerging and latent demand. And they successfully satisfy this latent demand via innovation that creates value for customers. Ultimately, innovation should be funded out of profitable growth and not just investment capital.

As long as Netflix continues to innovate in a way that the benefits I get exceed the dollars I pay, I will remain a happy customer.